Social Security Increase Unlikely For a Second Year

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For the first time since 1975, Social Security beneficiaries received no cost-of-living adjustment (COLA) this year because prices fell in 2009. President Obama tried to offset the loss by proposing a special $250 check in lieu of a COLA, which would have cost more than $13 billion . But the Senate rejected that measure by a vote of 50-47.

Now, there may be more disappointing news for 43 million seniors: This year’s low inflation may mean no COLA increase in 2011.

The final piece of the puzzle in determining the size of any 2011 COLA, the September consumer price index, will be released a little more than two weeks before the midterm elections on Nov. 2. While public concern about the size of the $1.4 trillion federal budget deficit has risen sharply in recent months, the temptation for politicians to garner favor with seniors surely will be there — a temptation that Obama and Congress should resist.

Unintended Consequences

The COLA is based on the percentage change in consumer prices from the third quarter of one year to the same quarter the following year. Because of a big increase in energy prices from 2007 to 2008, the Social Security COLA was a whopping 5.8 percent in January 2009. With energy prices later falling and the onset of recession, the price index declined 2.1 percent between the third quarters of 2008 and 2009. Hence, no COLA for 2010. Social Security benefits were indexed for inflation beginning in the 1970s precisely to stop politicians from repeatedly increasing them on an ad hoc basis. It’s also worth mentioning that adding a few dollars to a monthly Social Security check isn’t a good way to boost the economy. There are better ways to implement more economic stimulus if necessary, as many believe it is. Moreover, it’s far from clear that a modest COLA would be of much help to seniors.

Consumer prices are increasing this year, but according to most forecasts, not by enough to trigger a COLA. In fact, the Obama administration's fiscal 2011 budget released in February assumed there would be no COLA next year. With several more months of price data available, that's still looking like a good bet.

One benefit for the 31 million qualifying seniors — they don’t have to pay the $169 annual Medicare Part B increase because there was no COLA. It’s not as good as a $250 check but at least it’s not taxable.

The 25 percent paying larger premiums include individuals and couples with higher incomes who routinely pay an extra means-tested premium. This group will likely be hit with increases next year, as medical expenses rise. Also, about 17 percent of those enrolled in Part B are covered by Medicaid, and the states, which pay their premiums for that group, coughed up more money as well.

covered the Federal Reserve and the economy for 25 years at the <em>Washington Post</em> before joining Bloomberg News in 2004. In 2009 he began writing freelance pieces for, among others, Thomson Reuters, and is widely recognized for his ability to interpret the Fed.